The Plight of ‘Dog’ Funds: A Cautionary Tale for Investors
In the ever-volatile world of investments, the term ‘dog’ funds has become a stark reminder of the risks and challenges inherent in managing wealth. Recent data from Bestinvest’s “Spot the Dog” report highlights a troubling trend: the wealth tied up in underperforming equity investment funds has seen a significant increase, posing a critical question for investors and financial advisers alike.
What are ‘Dog’ Funds?
‘Dog’ funds are defined as those that have failed to beat their benchmarks over three consecutive 12-month periods, with an underperformance of 5% or more over the entire three-year period. This metric serves as a clear indicator of funds that are not delivering the expected returns, leaving investors with subpar performance and potential losses.
The Current Landscape
The latest “Spot the Dog” report reveals a sobering picture. Despite a slight reduction in the number of underperforming funds from 151 to 137, the total value of assets held by these ‘dog’ funds remains substantial, at £53.42 billion. This figure, although down 44% from the previous £95.26 billion, still represents a significant portion of investors’ wealth.
Sectoral Underperformance
Global equity funds lead the pack of underperformers, with 44 funds holding £26.18 billion in assets. The UK equity sector is also heavily represented, with 44 funds in the UK All Companies, UK Equity Income, and UK Smaller Companies sectors, collectively managing £11.14 billion. Notably, a quarter of these underperforming UK funds are ethical and sustainable funds, which have suffered due to their limited exposure to the energy and commodities sectors.
Case in Point: Nick Train’s UK Equity Fund
One of the notable funds featured in the report is Nick Train’s UK Equity product. Train, a well-respected fund manager, has recently apologised for the poor performance of his Finsbury Growth & Income trust. Over the last five years, the trust’s share price has grown only 10.9%, significantly lagging behind its benchmark’s growth of 26.5%. This underperformance is a stark example of how even seasoned managers can face challenges in a changing market environment.
Reasons Behind Underperformance
Several factors contribute to the underperformance of these funds. For instance, the lack of exposure to high-performing sectors such as energy and commodities has been a major hindrance. Additionally, the shift in market dynamics, particularly the rise of AI-themed stocks and other emerging sectors, has left some funds struggling to keep pace. The concentration of investments in specific regions or sectors, as seen in Nick Train’s focus on the UK market, can also lead to underperformance if those areas do not perform well.
What Investors Should Do
While the presence of ‘dog’ funds is a cause for concern, it does not necessarily mean that these funds should be immediately discarded. It is crucial for investors to understand the reasons behind the underperformance and to monitor any corrective actions being taken by the fund managers. Sometimes, retaining a fund while it undergoes a strategy redesign or manager change can be beneficial. However, this decision should be made after a thorough review of the fund’s performance, the investor’s risk attitude, tax position, and overall asset allocation.
Conclusion
The rise in wealth tied up in ‘dog’ funds serves as a reminder of the importance of vigilant portfolio management. Investors must stay informed and actively monitor their investments to avoid prolonged periods of underperformance. At Cutts & Co Accountancy, we advise our clients to regularly review their investment portfolios, considering all relevant factors before making any decisions. By doing so, investors can mitigate risks and ensure their wealth is managed in a way that aligns with their financial goals.
In the words of Nick Train, who has candidly acknowledged the challenges faced by his funds, “I sort of feel I’m running out of ways to say sorry.” This humility underscores the need for continuous improvement and adaptability in investment strategies. As we navigate the complex landscape of investments, it is essential to learn from the experiences of both successful and underperforming funds to make informed decisions that protect and grow our clients’ wealth.
